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Misuse and Exhaustion

Misuse and Exhaustion. Intro to IP – Prof Merges 2.5.09. What can a patentee legitimately do to exercise control over a technology?. Licensing restrictions: conditions on use of a patented item Misuse: does such a restriction exceed the market power appropriate to the patent?

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Misuse and Exhaustion

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  1. Misuse and Exhaustion Intro to IP – Prof Merges 2.5.09

  2. What can a patentee legitimately do to exercise control over a technology? • Licensing restrictions: conditions on use of a patented item • Misuse: does such a restriction exceed the market power appropriate to the patent? • Exhaustion: is such a restriction prevented by initial sale of the patented item?

  3. Defenses: Antitrust/Misuse • Patents confer market power • Market power can be abused • When it has been, this may provide a defense for an infringer

  4. Antitrust/Misuse • Centers on how the patentee deploys the technology • Numerous potential ways to abuse the market power conferred by a patent

  5. Examples • Use of patents to mask or hide a cartel • “Horizontal” abuse • Use of patents to exert control over dealers or customers • “Vertical” abuse

  6. Misuse/Antitrust Counterclaim Defendant Plaintiff/Patentee

  7. Misuse/Antitrust Counterclaim Defendant Plaintiff/Patentee Counterclaim

  8. Misuse/Antitrust Counterclaim Defendant Plaintiff/Patentee Licensing Agreement

  9. Misuse/Antitrust Counterclaim Defendant Plaintiff/Patentee Licensing Agreement Defendant asserts patent is unenforceable due to anticompetitive licensing agreement

  10. Typical Counterclaims • Anticompetitive acquisition of patent • Walker Process Equipment , Inc . v . Food Machinery Chemical Corp., 382 U . S . 172 (1965); Handgards, Inc . v . Ethicon, Inc . 743 F . 2d 1282 (9th Cir . 1984) • Illegal tie-in • Morton Salt

  11. Motion Picture Patents Co. Projector may only be used with Edison brand films.

  12. Holding: P. 334 • Patent is limited to film feeding device for projectors • Patentee should not be allowed to extend patent to cover film not claimed in the patent • Injury to the public interest

  13. Illinois Tool Trident, a wholly-owned subsidiary of Illinois Tool Works, is a manufacturer of printheads and owns U.S. Patent No. 5,343,226 covering the ink jet print head. Trident also manufactures ink for use with the patented printheads. Although the ink is not protected by any of Trident’s patents, their standard license agreements grant the right to “manufacture, use and sell… ink jet printing devices…” to other printer manufacturers ONLY “when used in combination with ink and ink supply systems supplied by Trident.”

  14. Misuse/Antitrust Counterclaim Defendant Plaintiff/Patentee Licensing Agreement Defendant asserts patent is unenforceable due to anticompetitive licensing agreement

  15. Independent Ink also manufactures ink useable in Trident’s patented printheads. Independent filed suit in the Central District of California against Trident and Illinois Tool Works alleging, among other things, an illegal tying arrangement in violation of section 1 of the Sherman Act. The district court, however, dismissed the case on summary judgment.

  16. Sherman Act: Section One 15 U.S.C. § 1 Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal. Every person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $10,000,000 if a corporation, or, if any other person, $350,000, or by imprisonment not exceeding three years, or by both said punishments, in the discretion of the court.

  17. Sherman Act: Section One 15 U.S.C. § 2 Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $10,000,000 if a corporation, or, if any other person, $350,000, or by imprisonment not exceeding three years, or by both said punishments, in the discretion of the court.

  18. Theoretical basis • “Leverage theory” • Patents being improperly leveraged by various licensing practices • For example, a tie-in

  19. Tie-in example • If you want my patented machine, you must buy (unpatented) materials used in the machine

  20. Morton Salt case

  21. “[R]espondent is making use of its patent monopoly to restrain competition in the marketing of unpatented articles, the salt tablets, for use with the patented machines . . .”

  22. Leverage theory • “Leveraging” monopoly in machine into (separate) market for salt

  23. No such thing as “leverage” Cannot charge more for [Tying + Tied] product bundle than buyers are willing to pay Chicago Critique

  24. More Chicago critique • Look for more “positive” explanation of licensing practices • Patentees deserve a monopoly • How might it be good for the patentee and consumers?

  25. “Metering” Concept • Relates back to price discrimination idea: charge effectively different price for different classes of users: • High-value vs. low-value users

  26. Patent Exhaustion • To exhaust: to run out of, use up • What is “used up”? The “power” of a patent • When is it used up? When an item covered by the patent is sold on the market

  27. LG Electronics (Patent Owner) Intel (Licensee) Computer Cos.

  28. LG Electronics (Patentee) Master License (required non-coverage notice to Intel Customers) Intel (Licensee) Specific product license (no customer restrictions)

  29. Intel (Licensee) LG’s right to Sue? Computer Cos.

  30. LG Electronics (Patentee) Intel End Users

  31. Intel (Licensee) + License? End Users

  32. LG Sued End Users – Bizcom, Quanta, etc. • End Users defended by claiming that they were protected against suit by virtue of the LG-Intel license agreement, and Intel’s sale of chips to them

  33. District Court • LG argued that end users were not protected by exhaustion, since the chips sold by Intel did not completely embody any claims in the asserted patents • District Court disagreed: held, sales of chips by Intel exhausted LG’s rights vis-à-vis end users

  34. Federal Circuit • Partial reversal • No exhaustion: LG did not authorize Intel to authorize end-users to combine Intel products with non-Intel products

  35. Quanta Computer, Inc. v. LG Electronics, Inc. • 128 S.Ct. 2109 (2008) • Held: licensee's sale of component computer parts that substantially embodied method patents held by patentee was “authorized” by patent holder, and had effect of exhausting patent holder's patents.

  36. Supreme Court: Holdings • Method claims are subject to exhaustion • Embodiments substantially containing claimed technology exhaust a patent • Sales in this case were “authorized sales” under the licensing arrangement in this case: so patents were exhausted

  37. 128 S.Ct. 2109, 2020 [I]f [a] device practices patent A while substantially embodying patent B, its relationship to patent A does not prevent exhaustion of patent B. For example, if the Univis lens blanks had been composed of shatter-resistant glass under patent A, the blanks would nonetheless have substantially embodied, and therefore exhausted, patent B for the finished lenses. This case is no different.

  38. Supreme Court: Holdings • Method claims are subject to exhaustion • Embodiments substantially containing claimed technology exhaust a patent • Sales in this case were “authorized sales” under the licensing arrangement in this case: so patents were exhausted

  39. Third holding: important for future cases • We can learn from the LG – Intel – End User arrangement • Drafting tips

  40. Basic exhaustion principles • “Exhaustion is triggered only by a saleauthorized by the patent holder.” • > 128 S.Ct. 2109, 2121

  41. Two elements here • [1] SALE only • > Licensing is outside this holding • > Creative licensing arrangements are still permissible

  42. [2] Authorized by the patent holder • > Principles of implied licensing come into play

  43. LG Electronics (Patentee) Master License (required non-coeverage notice to Intel Customers) Intel (Licensee) Specific product license (no customer restrictions)

  44. No restriction on customers’ use of patented technology “[T]he provision requiring notice to Quanta appeared only in the Master Agreement, and LGE does not suggest that a breach of that agreement would constitute a breach of the License Agreement. Hence, Intel's authority to sell its products embodying the LGE Patents was not conditioned on the notice or on Quanta's decision to abide by LGE's directions in that notice.”-- 128 S.Ct. 2109, 2121-2122

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